- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-----------------------------------------------------
(Mark one)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the
Quarterly period ended September 30, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
__________ to __________
Commission File Number 0-27788
EVOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3420712
(State of Incorporation) (I.R.S. Employer Identification No.)
266 Harristown Road, Glen Rock, New Jersey 07452
(Address of principal executive offices and zip code)
(201) 493 - 9595
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at January 15, 1998
Common Stock, $.01 par value 6,562,280
- -------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements commence on Page F-1.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Evolutions, Inc., a Delaware corporation (the "Company") merged with
Gold Securities Corporation ("Gold"), an Idaho corporation, in February 1996 for
the purpose of changing the state of incorporation from Idaho to Delaware. The
Company trades publicly on the NASDAQ electronic bulletin board under the symbol
"EVOI" and prior to the merger traded on the NASDAQ electronic bulletin board
under the symbol "GLDS." Gold was incorporated in 1922 under the name of Kaniksu
Mining Company ("Kaniksu"). In 1981, Kaniksu merged with Gold, and adopted that
company's name. In July of 1995, Gold entered into a reverse merger with EVO
Manufacturing, Inc., a company incorporated in the State of New Jersey ("EVO").
The majority owner of EVO, PureTec Corporation ("PureTec"), a publicly held
specialty plastics and plastics recycling company, retained ownership of 74% of
the outstanding common stock of the Company after completion of the July 1995
reverse merger. EVO was the only operating subsidiary of the combined companies
at the time of the July 1995 merger. For accounting purposes, the transaction
was treated as the acquisition of Gold by EVO. As a result, the Company's
financial statements consist of the results of operations of EVO since its
inception in 1994. In February 1996, the Company effected a 0.033-for-1 reverse
stock split. All share amounts reflect this split.
On September 27, 1995, Kidsview, Inc. ("KVI"), a wholly owned
subsidiary of the Company, purchased certain assets of Direct Connect
International Inc. ("DCI") consisting primarily of a licensed line of toy
animals marketed under the trade names TEA BUNNIES (Registered Trademark) and
ZOO BORNS (Registered Trademark). Additionally, KVI entered into an agreement to
retain the services of key management personnel from DCI.
In February 1996, the Company acquired substantially all the assets of
Smart Style Industries, Inc. and Affiliates (collectively "SSI"). The Company
operates these assets through its wholly-owned subsidiaries, Smart Style
Acquisition Corp., Lions Acquisition Corp. and Lions Holding Corp. (collectively
"SSA"). SSA is a manufacturer and marketer of childrens apparel. The Company's
line of recycled apparel products will be combined with SSA's business
operations.
In connection with the SSI acquisition, SSA also acquired a license to
use the H.W. Carter & Sons, Inc.'s ("H.W. Carter") Watch the Wear (Registered
Trademark) label.
On September 9, 1996, KVI entered into a license agreement with Sandbox
Entertainment, Inc. with respect to Pillow People (Trademark) stuffed toy and
doll products.
In April 1997, SSA ceased its apparel manufacturing operations and
laid-off all employees at its Gastonia, GA location involved in the
manufacturing process.
2
<PAGE>
On April 30, 1997, SSA sold its Cutecumber (Registered Trademark) line
to Snake Creek Manufacturing Co., Inc., for cash and a future royalty, the
proceeds all of which were made payable to Heller Financial, Inc., ("Heller") in
accordance with SSA's financing agreement with Heller.
Effective April 30, 1997, the management agreement between DCI and KVI
was terminated. KVI has not generated any revenue since April 30, 1997, and
there can be no assurance that KVI will be successful in generating revenues in
the future.
On May 2, 1997, the owner of the H.W. Carter Watch the Wear (Registered
Trademark) label terminated SSA's rights to the license.
On May 15, 1997, SSA's secured lender, Heller Financial, Inc.,
foreclosed on substantially all of the assets of the apparel subsidiaries.
Effective June 6, 1997, the subsidiaries filed for protection under Chapter 11
of the Bankruptcy Code. SSA is in the process of actively seeking the return of
preference payments made ninety days prior to the bankruptcy. Proceeds will be
used for secured creditors and any remaining balance will be distributed to
priority creditors. Subsequently, in December 1997, at the Bankruptcy court's
recommendation, the subsidiaries changed their bankruptcy status to Chapter 7.
On July 15, 1997, the license for KVI's rights to market TEA BUNNIES
(Registered Trademark) was terminated by the licensor.
KVI has not generated any revenues since April 30, 1997 and on October
8, 1997, voluntarily filed for protection from its creditors under Chapter 7 of
the United States Bankruptcy Court in the District of New Jersey.
The following discussion and analysis should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 1996.
Results of Operations
Three months ended September 30, 1997 and 1996
The Company had net sales of $-0- for the three months ended September
30, 1997 as compared to $7,748,605 for the three months ended September 30,
1997. Gross margin for the Company was $-0- for the quarter ended September 30,
1997 as compared to $2,645,775 for the same period in 1996. The decreases in net
sales and gross margin are attributable to the Company ceasing operations in the
toy segment as of April 30, 1997 and the apparel segment as of May 15, 1997.
The Company had a net loss of $2,058,682 for the third quarter of 1997
as compared to net income of $282,406 for the third quarter of 1996.
Nine months ended September 30, 1997 and 1996
The Company had net sales of $10,028,287 for the nine months ended
September 30, 1997 as compared to $12,284,818 for the nine months ended
September 30, 1996. Apparel segment sales were $ 7,155,771 for the nine months
ended September 30, 1997 as compared to $6.000,354 for the nine months ended
3
<PAGE>
September 30, 1996. Toy sales for the nine months ended September 30, 1997 were
$2,872,516 and were $6,284,464 for the nine months ended September 30, 1996. The
decrease in sales between the three quarters ended September 30, 1997 and the
same period in 1996 is attributable to the foreclosure on the apparel assets by
its secured creditor and the termination of the management agreement on the toy
segment as of April 30, 1997.
Gross margin for the Company was $1,124,055 for the nine months ended
September 30, 1997 as compared to $4,284,101 for the same period in 1996. The
decrease in gross margin is attributable to the same factors as the decrease
sales.
During the nine months ended September 30, 1996, the Company sold the
remaining 230,000 PureTec shares and recorded a loss of $519,477 on the sale.
The Company had received these shares from PureTec in March 1995 as a capital
contribution.
The Company had a net loss of $7,560,754 for the nine months ended
September 30, 1997 as compared to $2,012,372 for the third quarter of 1996.
Financial Position, Liquidity and Capital Resources
The Company had a working capital deficit of approximately $11,876,722
at September 30, 1997 as compared to working capital of $4,618,401 at December
31, 1997. The increase in working capital deficit is attributable to the
Company's bankruptcy status; assets were foreclosed upon by the Company's
secured creditor and all debt is in default and thus classified as current
liabilities.
Bridge Notes
In February and March of 1996, the Company borrowed an aggregate of
$3,000,000 from various outside sources (the "Bridge Lenders"). In exchange, the
Company issued to the Bridge Lenders notes (the "Bridge Notes") for the face
amount of the loans due May through August 1996. The Bridge Notes accrue
interest at the rate of 8% per annum. In addition, the Company issued to the
Bridge Lenders warrants to purchase a total of 3,700,000 shares of the Company's
Common Stock. The exercise price of the warrants is $3.50 per share of stock
purchased and expire five years from the date of issuance. In May 1996, the
Company borrowed an additional $100,000 on terms identical to the original
Bridge Notes and used those proceeds to repay some of the expiring Bridge Notes.
In October 1996, $100,000 of Bridge Notes were converted into the
private placement, and, in addition, the Company converted $400,000 of Bridge
Notes into a Convertible Note bearing interest at 8%. The terms allow the holder
to convert the Convertible Note into the private placement until the due date on
April 22, 1997. The balance of the Bridge Notes totaling $450,000 have been
converted into Demand Notes. As of September 30, 1997, the Company had $850,000
of original Bridge Notes outstanding. The Convertible Notes and Demand Notes are
currently in default.
4
<PAGE>
Loans Payable
At December 31, 1996, the Company had loans payable and accrued
interest of approximately $148,000 consisting of secured notes to relatives and
affiliates of Michael Nafash, CEO, President and a Director of the Company. The
notes are due on demand and bear interest at the rate of 12% per annum. The
notes are secured by 25,000 shares of Glasgal Communications, Inc. common stock
and all other marketable securities held by the Company. On May 29, 1997, the
noteholder foreclosed on the collateral and has since accepted the collateral as
full payment of the debt. At that date, the collateral had a market value of
approximately $100,000.
Factoring Arrangements
In February 1996, SSA entered into a financing agreement with First
Factors Corporation whereby SSA may take advances on their uncollected accounts
receivable up to a limit of 90%. This facility was terminated by SSA on July 2,
1996. In July 1996, SSA and EVO, entered into a financing agreement with Heller
Financial, Inc. ("Heller") whereby SSA may take advances on both subsidiaries'
uncollected accounts receivable up to a limit of 90%. SSA may over advance on
this facility by up to $1,000,000. Interest accrues at the prime rate plus 1%.
Additionally, a fee of 0.75% is due on invoices assigned. The facility can be
canceled by either party on sixty days written notice. This facility is
collateralized by the accounts receivable and finished goods inventory of SSA
and EVO and guaranteed by the Company. This facility supersedes the facility
entered into in February 1996 between the SSA and First Factors, Inc. As part of
the agreement, Heller has indemnified First Factors, Inc. against all
outstanding over advances and uncollected accounts receivable.
In April 1996, KVI entered into a financing agreement with Heller
Financial, Inc. whereby KVI may take advance on uncollected accounts receivable
up to a limit of 90%. Interest accrues on monies advanced at the prime rate plus
2%. Additionally, a fee of 1% is due on amounts advanced. This facility is
guaranteed by the accounts receivable and domestic inventory of KVI and also by
the Company. Because of the bankruptcy proceedings with SSA, Heller advised KVI
that it would no longer make advances to KVI.
On May 15, 1997, Heller foreclosed on substantially all of the assets
of SSA. Effective, June 6, 1997, the subsidiaries filed for protection under
Chapter 11 of the Bankruptcy Code. SSA is in the process of actively seeking the
return of preference payments made ninety days prior to the bankruptcy. Proceeds
will be used for secured creditors and any remaining balance will be distributed
to priority creditors.
Mortgage Payable
In May 1996, SSA refinanced the existing mortgage on its production and
warehouse facility located in Gastonia, North Carolina with Branch Bank & Trust
Co.("BB&T") The $750,000 loan bears interest at the prime rate plus 1.5% payable
monthly. The term is for 35 months, with principal payments of $4,166.67 due
monthly beginning June 1, 1996, and a balloon payment at May 1, 1999 of
$604,166.55. The loan is collateralized by the property and guaranteed by the
Company. On July 29, 1997, BB&T foreclosed on the property due to SSA's
inability to meet the mortgage payments. BB&T subsequently sod the building for
approximately $450,000.
5
<PAGE>
Cash Flow
The Company currently has no cash flows from operations.
Net cash provided by operating activities for the nine months ended
September 30, 1997 was $580,805 which is comprised primarily of a decrease in
inventory of $5,246,163 and an increase in accounts payable of $2,199,213 offset
by a net loss of $7,560,754. Cash flows from investing activities consisted of
the sale of machinery and equipment, proceeds from the sale went to Heller.
Financing activities consisted of net borrowing from factor of $971,004.
The Company's statement of cash flows for the nine months ended
September 30, 1996 reflects cash used in operations of $4,605,484 which is a
result of the net loss of $2,012,372, a decrease in inventories of $5,106,167
partially offset by a loss on sales of securities of $519,477. Net cash used in
investing activities was $1,492,981, which consists primarily of the purchase of
SSA. Cash flows from financing activities consisted of private placement loan
proceeds of $4,572,540 and proceeds from additional financing of $2,449,936
offset by a repayment to a related party of $665,781.
Inflation
The Company has not been materially affected by the impact of
inflation.
6
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
SSA's secured lender, Heller Financial, Inc., has foreclosed on
substantially all of the assets of the apparel subsidiaries. Effective, June 6,
1997, the subsidiaries filed for protection under Chapter 11 of the Bankruptcy
Code. SSA is in the process of actively seeking the return of preference
payments made ninety days prior to the bankruptcy. Proceeds will be used for
secured creditors and any remaining balance will be distributed to priority
creditors. Subsequently, in December 1997, at the Bankruptcy court's
recommendation, the subsidiaries changed their bankruptcy status to Chapter 7.
Kidsview, Inc. ("KVI"), a wholly-owned subsidiary of Evolutions, Inc.,
has not generated any revenues since April 30, 1997. KVI, on October 8, 1997,
voluntarily filed for protection from its creditors under Chapter 7 of the
United States Bankruptcy Court in the District of New Jersey.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. (a) Exhibits and (b) Reports of Form 8-K
(a) None.
7
<PAGE>
(b) The Company filed a current Report on Form 8-K on April 16, 1997
which included (I) The Company's secured lender, Heller Financial, Inc., has
foreclosed on substantially all of the assets of the Company's apparel
subsidiaries. Effective, June 6, 1997, the subsidiaries have filed for
protection under Chapter 11 of the Bankruptcy Code. (ii) Between the period
April 16, through May 12, 1997, all members of the Company's Board of Directors
resigned except for Michael Nafash, President and Chief Executive Officer. None
of the resignations involved any disagreement with the Company on any matter
relative to the Company's operations, policies or practices.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EVOLUTIONS, INC.
/s/ Michael Nafash
By: Michael Nafash
Chief Executive Officer,
President and Chief
Financial Officer
Dated: January 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of January 15,1998 by the following persons
on behalf of Registrant and in the capacities indicated.
/s/ Michael Nafash Dated: January 15, 1998
- ------------------
Michael Nafash, Director, CEO, CFO and
President
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 52,085 $ 222,284
Due from agent ................................. -- 318,000
Investments in available-for-sale securities ... -- 7,173
Accounts receivable ............................ -- 358,142
Due from factor ................................ -- 257,687
Inventories (Note 3) ........................... -- 5,246,163
Prepaid expenses and other current assets ...... -- 207,659
------------ ------------
52,085 6,617,108
PROPERTY, PLANT AND EQUIPMENT, net (Note 4) ...... 262,616 504,087
OTHER ASSETS ...................................... 0 50,693
------------ ------------
$ 314,701 $ 7,171,888
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to factor (Note 5) ........................ $ 167,417 $ 1,138,421
Payroll taxes payable ......................... 1,337,069 935,659
Accounts payable .............................. 7,803,901 5,604,688
Accrued expenses .............................. 928,644 1,721,246
Bridge notes payable (Note 6) ................. 850,000 850,000
Loans payable (Note 7) ........................ -- 143,719
Long-term debt in default ..................... 841,776 841,776
------------ ------------
11,928,807 11,235,509
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized; 6,562,280 issued and outstanding
outstanding at September 31, 1997 .......... 65,623 65,623
Common stock, no par value, 50,000,000 shares
authorized; 3,599,553 issued and outstanding
at September 30, 1997, stated at ........... -- --
Preferred stock; authorized 5,000,000 shares;
-0- issued and outstanding ................. -- --
Additional paid-in capital .................... 9,469,585 9,469,585
Deficit ....................................... (21,145,364) (13,584,610)
Unrealized holding loss on securities ......... -- (10,269)
available-for-sale
Treasury stock ................................ (3,950) (3,950)
------------ ------------
(11,614,106) (4,063,621)
------------ ------------
$ 314,701 $ 7,171,888
============ ============
</TABLE>
See notes to financial statements
F-1
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
September 30 , September 30 ,
1997 1996 1997 1996
----------- ---------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES .............................. $ -- $ 7,748,605 $ 10,028,287 $ 12,284,818
COST OF SALES ......................... -- 5,102,830 8,904,232 8,000,717
----------- ----------- ------------ ------------
GROSS PROFIT .......................... -- 2,645,775 1,124,055 4,284,101
----------- ----------- ------------ ------------
COSTS AND EXPENSES:
Selling, general and administrative 501,991 1,291,306 5,823,486 3,382,703
Advertising and promotion ......... 1,548,236 571,997 2,624,794 1,928,086
Amortization ...................... -- 64,422 -- 151,268
----------- ------------ ------------
2,050,227 1,927,725 8,448,280 5,462,057
----------- ----------- ------------ ------------
OPERATING (LOSS) INCOME ............... (2,050,227) 718,050 (7,324,225) (1,177,956)
----------- ----------- ------------ ------------
OTHER (INCOME) EXPENSE:
Other Income ...................... (10,000) -- (10,000) --
Loss on sale of securities ........ -- 229,918 -- 519,477
Interest expense .................. 18,455 205,726 373,805 314,939
Interest income ................... -- -- (999) --
----------- ----------- ------------ ------------
8,455 435,644 362,806 834,416
----------- ----------- ------------ ------------
Net (Loss) Income before
Extraordinary Item .................. (2,058,682) 282,406 (7,687,031) (2,012,372)
Extraordinary Item - Gain on
extinguishment of Debt due to
foreclosure (Note 7) ................ -- -- 126,277 --
----------- ----------- ------------ ------------
NET LOSS .............................. (2,058,682) 282,406 (7,560,754) (2,012,372)
=========== =========== ============ ============
NET LOSS PER SHARE
Net Loss before extraordinary item $ (.31) $ .04 $ (1.17) $ (.39)
Extraordinary Item 0.00 0.00 .02 0.00
----------- ----------- ------------ ------------
Net Loss $ (.31) $.04 $ (1.15) $ (.39)
=========== =========== ============ ============ ============
Weighted average number of
common shares outstanding .......... 6,562,280 6,318,489 6,562,280 5,125,601 0
=========== =========== ============ ============ ============
</TABLE>
See notes to financial statements
F-2
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Common Shares Loss on
------------------------------------------------ Additional Available
Common, Common, Common, Paid-in for-Sale Treasury
$10 Par No Par $.01 Par Amount Capital Deficit Securities Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1994 1,000 0 0 $ 10,000 $ 865,000 ($ 341,538) ($ 70,394) $---- $ 463,068
Issuance of stock
to parent ...... 850 -- -- 8,500 1,916,500 -- -- -- 1,925,000
Surrender of
stock .......... (200) -- -- (2,000) 2,000 -- -- -- 0
Capital
contribution ... -- -- -- -- 300,000 -- -- -- 300,000
Merger with
Gold
Securities, Inc. (1,650) 3,550,053 -- 3,300,535 (3,083,500) -- -- -- 217,035
Issuance of
stock in
connection
with asset
acquisition .... -- 49,500 -- 75,000 -- -- -- -- 75,000
Change in
unrealized
holding loss
on available-
for-sale
securities ..... -- -- -- -- -- -- (552,562) -- (552,562)
Net Loss ........ -- -- -- -- -- (1,602,952) -- -- (1,602,952)
------ ----------- ---------- ----------- ----------- ------------ --------- ------- ------------
Balance,
December 31,
1995 0 3,599,553 0 3,392,035 0 (1,944,490) (622,956) 0 824,589
(Unaudited)
Adjustments for
reverse split .. -- 6,236 -- -- -- -- -- -- 0
Merger to affect
change of state of
incorporation .. -- (3,605,789) 3,605,789 (3,355,977) 3,355,977 -- -- -- 0
Issuance of stock
in connection
with asset
acquisition .... -- -- 845,000 8,450 1,194,550 -- -- -- 1,203,000
Issuance of common
shares for
payment of
accrued bonuses -- -- 125,000 1,250 111,250 -- -- -- 112,500
Issuance of
securities
in private
placements
for cash, net .. -- -- 1,832,500 18,325 4,559,348 -- -- -- 4,577,673
Issuance of
securities
in conversion
with debentures -- -- 153,991 1,540 248,460 -- -- -- 250,000
Change in
unrealized
holding loss
on available-
for-sale
securities ..... -- -- -- -- -- -- 612,687 -- 612,687
Repurchase of
shares ......... -- -- -- -- -- -- -- (3,950) (3,950)
Net loss ........ -- -- -- -- -- (11,640,120) -- -- (11,640,120)
------ ----------- ---------- ----------- ----------- ------------ --------- ------- ------------
Balance,
December 31,
1996 0 0 6,562,280 65,623 9,469,585 (13,584,610) (10,269) (3,950) (4,063,621)
Change in
unrealized
holding loss
on available-
for-sale
securities ..... -- -- -- -- -- -- 10,269 -- 10,269
Net loss ........ -- -- -- -- -- (7,560,754) -- -- (7,560,754)
------ ----------- ---------- ----------- ----------- ------------ --------- ------- ------------
Balance,
September 30,
1997 0 $ 0 $6,562,280 $ 65,623 $ 9,469,585 ($21,145,364) $ 0 ($3,950) ($11,614,106)
====== =========== ========== =========== =========== ============= ========= ======== =============
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
EVOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1997 1996
------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. ($7,560,754) ($2,012,372)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on foreclosed debt ............................ (126,277) --
Depreciation and amortization ...................... 21,471 257,952
Loss on sale of securities ......................... -- 519,477
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable .......................... 358,142 (796,719)
Prepaid expenses and other ................... 207,659 (101,764)
Due from agent ............................... 318,000 --
Due from factor .............................. 257,687 (431,176)
Inventories .................................. 5,246,163 (5,106,167)
Other assets ................................. 50,693 (66,193)
Increase (decrease) in liabilities:
Accounts payable ............................. 2,199,213 2,761,865
Accrued expenses ............................. (792,602) 369,613
Payroll taxes payable ........................ 401,410 --
----------- -----------
Total adjustments .................................. 8,141,559 (2,593,112)
----------- -----------
Net cash provided by (used in) operating activities 580,805 (4,605,484)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for businesses acquired, net of
cash acquired and including other cash
payments associated with the acquisition .............. -- (1,625,000)
Additions to property, plant and equipment ................ -- (735,579)
Decrease in due from broker ............................... -- 280,851
Proceeds from sales of securities ......................... -- 628,818
Decrease in note receivable - officer ..................... -- 15,000
Investment in available-for-sale securities ............... -- 42,929
Purchase of license ....................................... -- (100,000)
Sale of foreclosed assets ................................. 220,000 --
----------- -----------
Net cash provided by (used in) investing activities 220,000 (1,492,981)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from factor ................................ (971,004) --
Repayment to related party ................................ -- (665,781)
Issuance of convertible debentures, net of conversions .... -- 200,000
Purchase of treasury stock ................................ -- (3,950)
Net proceeds from additional financing .................... -- 2,449,936
Sale of private placements ................................ -- 4,572,540
----------- -----------
Net cash (used in) provided by financing activities (971,004) 6,552,745
----------- -----------
Net (decrease) increase in cash ............................... (170,199) 454,280
Cash and cash equivalents at beginning of period .............. 222,284 11,508
----------- -----------
Cash and cash equivalents at end of period .................... $ 52,085 $ 465,788
=========== ===========
</TABLE>
See notes to financial statements
F-4
<PAGE>
EVOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
(Unaudited)
1. Nature of Operations
Evolutions, Inc. (the "Company" or "Evolutions") was formed on January 21,
1994 and is engaged in the manufacturing and marketing of apparel and the
marketing of a line of toy animals.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated.
In April 1997, SSA ceased its apparel manufacturing operations at it
Gastonia, GA location and laid off all employees involved in the manufacturing
process.
On April 30, 1997, SSA sold its Cutecumber (Registered Trademark) line
to Snake Creek Manufacturing Co., Inc., for cash and a future royalty, all of
the proceeds which were made payable to Heller in accordance with SSA's
financing agreement with Heller.
Effective April 30, 1997, the management agreement between DCI and KVI
terminated. KVI has not generated any revenue since April 30, 1997 and there can
be no assurance that KVI will be successful in generating revenues in the
future.
On May 2, 1997, the owner of the H.W. Carter Watch the Wear (Registered
Trademark) label terminated SSA's rights to the license.
On May 15, 1997, SSA's secured lender, Heller foreclosed on
substantially all of the assets. Effective June 6, 1997, the subsidiaries filed
for protection under Chapter 11 of the Bankruptcy Code. SSA is in the process of
actively seeking the return of preference payments made ninety days prior to the
bankruptcy. Proceeds will be used for secured creditors and any remaining
balance will be distributed to priority creditors. Subsequently, in December
1997, at the Bankruptcy court's recommendation, the subsidiaries changed their
bankruptcy status to Chapter 7.
On July 15, 1997, the license for KVI's rights to market TEA BUNNIES
(Registered Trademark) were foreclosed on by the licensor.
KVI has not generated any revenues since April 30, 1997 and on October
8, 1997, voluntarily filed for protection from its creditors under Chapter 7 of
the United States Bankruptcy Court in the District of New Jersey.
2. Interim Reporting
F - 5
<PAGE>
The balance sheets as of September 30, 1997 and December 31, 1996, the
statements of operations for the three and nine months ended September 30, 1997
and 1996 and the statements of cash flows for the nine months ended September
30, 1997 and 1996 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normally recurring
adjustments ) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 1997 and for all periods presented
have been made.
Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements of Evolutions, Inc. and
subsidiaries for the year ended December 31, 1996. The results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of the
operating results for the full year.
The consolidated financial statements for the year ended December 31,
1996 are unaudited and have been prepared in accordance with generally accepted
accounting principles. In the opinion of management all adjustments (which
include only normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows have been included. Due
to the Company's financial position, the Company did not have the monies
necessary to have Holtz Rubenstein & Co., LLP, independent public accountants
for the past fiscal year, complete the audit.
3. Inventories
Inventories consist of the following:
September 30, December 31,
1997 1996
Raw Materials ................. $ -0- $500,000
Work-in-process ............... -0- 1,000,000
Finished goods ................ -0- 2,438,523
------- -----------
$ -0- $3,938,523
========= ===========
4. Property, Plant and Equipment
The building was SSA's manufacturing facility. On July 29,
1997, the building was foreclosed on by SSA's lender. The building's valued was
determined by an independent appraiser.
Additionally, machinery and equipment related to SAA's business
activity. The machinery and equipment are valued at $220,000. On May 15, 1997,
the assets were foreclosed upon by SSA's secured lender and were subsequently
auctioned for approximately $220,000.
The molds were used for the production of TEA BUNNIES (Registered
Trademark) by KVI. As KVI could no longer make royalty payments to the license
F - 6
<PAGE>
holder, the licensor terminated KVI's rights to the license. The molds have no
value.
5. Due to Factor
In February 1996, SSA entered into a financing agreement with First
Factors Corporation whereby SSA may take advances on their uncollected accounts
receivable up to a limit of 90%. This facility was terminated by SSA on July 2,
1996. In July 1996, SSA and EVO, entered into a financing agreement with Heller
Financial, Inc. ("Heller") whereby SSA may take advances on both subsidiaries'
uncollected accounts receivable up to a limit of 90%. SSA may over advance on
this facility by up to $1,000,000. Interest accrues at the prime rate plus 1%.
Additionally, a fee of 0.75% is due on invoices assigned. The facility can be
canceled by either party on sixty days written notice. This facility is
collateralized by the accounts receivable and finished goods inventory of SSA
and EVO and guaranteed by the Company. This facility supersedes the facility
entered into in February 1996 between the SSA and First Factors, Inc. As part of
the agreement, Heller has indemnified First Factors, Inc. against all
outstanding over advances and uncollected accounts receivable.
In April 1996, KVI entered into a financing agreement with Heller
whereby KVI may take advances on uncollected accounts receivable up to a limit
of 90%. Interest accrues on monies advanced at the prime rate plus 2%.
Additionally, a fee of 1% is due on amounts advanced. This facility is
guaranteed by the accounts receivable and domestic inventory of KVI and also by
the Company. Because of the bankruptcy proceedings with SSA, Heller advised KVI
that it would no longer make advances to KVI.
On May 15, 1997, Heller foreclosed on substantially all of the assets
of SSA. Effective, June 6, 1997, the subsidiaries filed for protection under
Chapter 11 of the Bankruptcy Code. SSA is in the process of actively seeking the
return of preference payments made ninety days prior to the bankruptcy. Proceeds
will be used for secured creditors and any remaining balance will be distributed
to priority creditors.
6. Bridge Notes Payable
In 1996, the Company borrowed an aggregate of $3,450,000 from various
outside sources (the "Bridge Lenders"). The Bridge Lenders received short-term
notes for the face amount of the loans bearing interest at 8% per annum. In
addition, the Company issued to the Bridge Lenders and loan facilitators
warrants to purchase a total of 4,575,000 shares of the Company's Common Stock.
The warrants have an exercise price of $3.50 per share of stock purchased and
expire five years from the date of issuance. The Company recorded an interest
charge of $42,000 related to these warrants.
In May 1996, the Company borrowed an additional $100,000 on terms
identical to the original Bridge Notes and used those proceeds to repay some of
the expiring Bridge Notes.
F - 7
<PAGE>
In October 1996, $100,000 of Bridge Notes were converted into the
private placement and, in addition, the Company converted $400,000 of Bridge
Notes into a Convertible Note bearing interest at 8%. The terms allow the holder
to convert the Convertible Note into the private placement until the due date on
April 22, 1997. The balance of the Bridge Notes totaling $450,000 have been
converted into Demand Notes. The Convertible Notes and Demand Notes are
currently in default.
7. Loans Payable
At December 31, 1996, the Company had loans payable and accrued
interest of approximately $148,000 consisting of secured notes to relatives and
affiliates of Michael Nafash, CEO, President and a Director of the Company. The
notes are due on demand and bear interest at the rate of 12% per annum. The
notes are secured by 25,000 shares of Glasgal Communications Inc. common stock
and all other marketable securities held by the Company. On May 29, 1997, the
noteholder foreclosed on the collateral and has since accepted the collateral as
full payment of the debt. At that date, the collateral had a market value of
approximately $100,000.
8. Income Taxes
At September 30, 1997, the Company has a 100% valuation allowance
against the deferred income tax asset related to net operating loss carry
forwards.
9. Industry Segments
The Company operates in two industry segments, apparel and toys.
Information concerning the Company's business segments as of September 30, 1997
is as follows:
Apparel Toys Consolidated
Revenues .................... $7,155,772 $2,872,515 $10,028,287
Operating loss .............. 1,393,087 6,404,196 7,324,225
Identifiable assets ......... 312,066 2,635 314,701
Depreciation and amortization 11,005 10,466 21,471
Capital expenditures ........ -0- -0- -0-
Information concerning the Company's business segments as of September
30, 1996 is as follows:
Apparel Toys Consolidated
Revenues .................... $ 6,000,354 $6,284,464 $12,284,818
Operating loss .............. 536,671 641,285 1,177,956
Identifiable assets ......... 10,197,521 3,286,131 13,483,652
Depreciation and amortization 198,234 59,718 257,952
Capital expenditures......... 159,111 576,468 735,579
KVI's line of toys was manufactured in Asia and sold to North American
retailers and distributors.
F - 8
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
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